Caution on Two Continents

10/07/2008 12:01 am EST


Tom Lydon

Editor and Publisher, ETF Trends

Tom Lydon, editor, ETF Trends, warns investors that both Russia and Canada continue to face their own problems.

Not long ago, Russia appeared to be standing its ground during this global credit crunch, but lately the country's economy and exchange-traded funds haven't seemed quite so resilient. Market Vectors Russia (NYSEArca: RSX) is down 50% so far this year. (It closed at $19.14 Monday-Editor.)

Many analysts back then predicted that the country's benchmark index would grow more than 30% and top 3,000 points by the end of this year. Russia's economy, [some] experts argued, would remain isolated from the woes of the United States, Europe and many emerging markets.

The opposite happened. The widening global financial crisis, falling oil prices and the Kremlin's bullying at home and abroad, have sent the RTS down about 50% this year, to just above 1,000 points. The ruble has plummeted and there have been billions of dollars in capital outflows, reports Business Week.

The truth is that Russia is not isolated from the global economy, as once thought, and the country cannot afford to keep to itself geopolitically. Long-term, the country must focus on diversification through education, health care and infrastructure, lessen energy dependency, and sustain growth.

[Much closer to home,] Canada's status as an economically freer country than the US could pay off for its exchange-traded fund (ETF), iShares MSCI Canada (NYSEArca: EWC).

As Marketplace recently reported, the United States is no longer the leader of laissez faire. Canada has more of it, even before the US government bailed out Fannie Mae and Freddie Mac-effectively nationalizing most of the mortgage industry-and followed that with the mega loan to AIG (NYSE: AIG), the world's biggest insurance company, [and the $700-billion bailout of the financial system].

While Canada is behind the United States in free speech and the right to bear arms in self-defense, it has surpassed us as the land of the free: Gay marriage is legal, you can dodge the draft, and you can smoke funny cigarettes-without fear of reprisals.

Canada still faces its own obstacles, however. Stagnation is setting in, and softening housing construction is adding to a tightening credit market. Projections for Canadian economic growth are 0.6% this year, and 1.3% for 2009.

At a closing price of $22.33 Monday, EWC is down over 20% so far this year. [The ETF weights] financial services at 30.1%, while energy accounts for 27.9% and industrial materials is weighted at 21.2%-fairly concentrated among the top holdings. Canada faces struggles similar to those in the United States, such as tight credit, high energy and food costs, and a slow housing market, coupled with slow economic growth.

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